How To Lower The DTI Ratio...?

Question

Hi guys, a family member of mine is trying to refinance his property with a commercial lender. I am just wondering what would happen to his DTI ratio if the lender refinances his property and does not report the new loan to the credit bureau? Will the DTI ratio drop as a result?

Thanks in advance!

Julee Felsman · Answer

@Tina Liao , @Ned Carey is spot on. You can't make a debt "go away" just because it is not reporting to the credit bureaus. And lenders run a lot of background checks that tend to turn up any real estate with which a borrower is affiliated, so efforts to hide debt are usually futile and, as Ned said, loan fraud.

There is a little color I would like to add, however. Debt that is in the name of a business entity (partnership/S Corp) and secured to a property owned by that entity is not included in a borrower's back DTI.

That is not to say it doesn't matter, but the debt is included in the analysis of the business. If the business is profitable, the net income is added to the borrower's qualifying income. If the business shows a loss, the loss is deducted from the borrower's qualifying income.

The effect of netting a loss from income, rather than including it as an expense in the borrower's DTI is significant. The same concept applies to alimony/spousal support payments, which some loan options will be allowed to be netted from income.

To illustrate, imagine we have a borrower making $5000 salary who has a $1000 alimony payment (or losses $1000 in a rental partnership, if you prefer). Our person also pays $300/mo of other bills and has applied for a loan that allows a 45% DTI. For the sake of simplicity we'll assume an owner-occupied purchase.

Putting our loss/alimony in the DTI looks like this:

$5000 income x 45% DTI = $2250 total debt allowed - $1300 alimony/other payments = $950 maximum PITI

Now let's net our loss/alimony from income:

$5000 income - $1000 alimony/loss = $4000 net income x 45% DTI = $1800 total debt allowed - $300 other debt = $1500 maximum PITI

That extra $550 of payment equates to about $110-115k in additional loan amount. Pretty meaningful.

So your family member may benefit DTI-wise.

[And real estate owned by a business entity, with a loan in the name of the business entity is disregarded as one of the maximum 10 financed properties allowed under conventional conforming (Fannie/Freddie) guidelines too.]

Ned Carey · Answer

@Tina Liao Your debt to income ratio does not change because some debt is reported to a credit reporting agency VS not  being reported.

You still have to report all debt when applying for a loan or you are committing bank fraud. Can you get away with it, possibly. Does that make it right NO!

Andrew Postell · Answer

@Tina Liao thanks for posting.  You've got some good responses above and it does depend on how this is structured currently, how it will be structured after the refinance, and how good the next lender would be when analyzing the "debt to income".  And it might be hard for us to really say how this will affect their DTI but I'll try to give it a shot:

• If the property is currently held by your family member (meaning, not in a company name) and the debt is in their personal name, AND they LOSE money on the property each year - then refinancing the loan AND putting the property into the company name (they both will need to be in the company name) will help your family member's DTI in most scenarios
• However, if your family member has the same scenario above BUT shows a profit on the house....then taking away that income by restructuring the loan and property will HURT their DTI.
• And we are assuming that they are trying to do something here....so how will the next lender look at this?  Not all lenders underwrite people the same way.

So, who do you know that can analyze their tax returns properly to determine the affect of restructuring this house?  You can only do this properly with a loan officer.  And that's the real truth to this. You need to have this family member go to a loan officer to analyze their current credit and income profile and run the numbers based on the results to tell you if the DTI will be negatively affected or positively affected.

Also...we aren't saying whether that NEGATIVE or POSITIVE affect will actually help them or not.  Meaning, if they are trying to do something that needs a 20% improvement on their DTI and this will only move it 5%....well, then it doesn't really matter.  So knowing what they are trying to do is also important.  Just have them share their goals with the loan officer and I think that will get them on the right path.

Hope all of this helps in some way.

•

Colton Hahn · Answer

assuming the monthly payment was no longer reported on the credit report, and the income was the same then yes the DTI would decrease. Not sure how they would get around the reporting laws for debt but the formula is Debt Payments / Monthly Income and the debt payments are generally pulled from the credit report.

Example: If previously the debt payments reported were 1,000 monthly and an income of 2,000 then it would result in a DTI of 50% (meaning 50% of income is unavailable for new debt payments, not good). If it was later reported that the income was 500 with an income of 2,000 the DTI would then be 25%

How To Lower The DTI Ratio...?

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